Cost Recovery Definition: MACRS, Section 179, and Bonus Depreciation

Cost recovery is the set of tax rules that let you deduct the cost of a long-term business asset across the years it produces income rather than all at once. In practice, cost recovery and tax depreciation are used almost interchangeably, though depreciation is really the main mechanism inside a larger toolkit that also includes Section 179 expensing, bonus depreciation, amortization for intangibles, and depletion for natural resources. For the 2026 tax year, the rules shifted meaningfully: the Section 179 deduction limit is $2,560,000, and 100% bonus depreciation is back permanently for qualifying property acquired after January 19, 2025.¹²

What Qualifies for Cost Recovery

An asset is depreciable if it meets three conditions: you own it, you use it in a trade or business or to produce income, and it has a useful life extending beyond one year.³ Anything you use up inside a single year, like office supplies or utilities, is just an ordinary business expense.

Three inputs drive every calculation. Cost basis is more than the sticker price; shipping, sales tax, and installation charges all get folded in. Useful life comes from IRS-assigned recovery periods, not your own estimate. Salvage value, for tax depreciation, is generally treated as zero.

Several categories are excluded. Land does not wear out or become obsolete, so it cannot be depreciated; when you buy a building, you have to allocate the purchase price between the land and the structure and depreciate only the structure.⁴ Inventory is recovered through cost of goods sold when you sell it. Personal-use property and investment assets like stocks and bonds are out. So is anything you place in service and dispose of in the same year.

MACRS: The Default Depreciation Method

The Modified Accelerated Cost Recovery System is the default method for depreciating tangible property placed in service after 1986.³ Each asset falls into a property class with a fixed recovery period set by statute:⁵

3-year property: certain manufacturing tools and racehorses
5-year property: computers, vehicles, office machinery, and research equipment
7-year property: office furniture, appliances, and most general-purpose equipment
15-year property: land improvements like fences, roads, and parking lots
27.5 years: residential rental buildings
39 years: nonresidential commercial buildings

MACRS typically uses the 200% declining balance method, front-loading depreciation into the early years, then automatically switches to straight-line at the point where straight-line yields a larger deduction. Fifteen- and 20-year property uses a slower 150% declining balance rate.⁵ Straight-line is always available as an election. You claim depreciation on IRS Form 4562.⁶

Section 179 Immediate Expensing

Section 179 lets you skip the multi-year schedule and deduct the full cost of qualifying assets in the year you place them in service. For 2026, the inflation-adjusted deduction limit is $2,560,000, phasing out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000.¹

The rule that catches people: the deduction cannot exceed your taxable income from the active conduct of your trade or business for the year. Section 179 cannot create or increase a net operating loss. Any unused deduction carries forward.¹

Qualifying property covers most tangible personal property used in your business, off-the-shelf computer software, and certain real property improvements including roofs, HVAC systems, fire suppression, and security systems. Lodging property, like a hotel building itself, generally does not qualify.

100% Bonus Depreciation After the OBBBA

Bonus depreciation is a separate first-year deduction layered on top of regular MACRS. The One Big Beautiful Bill Act permanently restored the 100% additional first-year depreciation deduction for qualified property acquired after January 19, 2025.² Businesses placing qualifying assets into service in 2026 can deduct the entire cost in year one. Used property qualifies too, as long as it is new to you.

One acquisition-date trap matters here: property acquired under a binding written contract entered before January 20, 2025, is treated as acquired on that contract date and may not get the restored 100% rate.⁷

Unlike Section 179, bonus depreciation has no dollar cap and no taxable income limitation. It can create or deepen a net operating loss. You can elect out for any class of property if you would rather spread deductions over time. The OBBBA also provides an election to take 40% instead of 100% for property placed in service during the first tax year ending after January 19, 2025.⁷

Section 179 vs. Bonus Depreciation

Both accelerate cost recovery into year one, but they behave differently. Section 179 is capped and limited by business taxable income, so a small business with modest profits can bump into the ceiling fast. Bonus depreciation has neither cap, which is why larger buyers usually reach for it first. Many businesses combine them: use Section 179 where it makes sense, then apply bonus depreciation to the rest.

The Luxury Vehicle Ceiling

Even with 100% bonus depreciation available, passenger vehicles hit annual caps that override the general rules. For vehicles placed in service during 2026:⁸

First year with bonus depreciation: $20,300
First year without bonus depreciation: $12,300
Second year: $19,800
Third year: $11,900
Each year after that: $7,160

The higher first-year figure requires more than 50% business use during 2026. If business use later falls to 50% or below, you may have to recapture excess depreciation.⁸ A $60,000 vehicle will not generate the same year-one write-off as a $60,000 piece of manufacturing equipment.

Amortizing Intangible Assets

Patents, trademarks, customer lists, and acquired goodwill are recovered through amortization rather than depreciation. When you buy these intangibles as part of a business acquisition, Section 197 requires straight-line amortization over 15 years starting in the month of acquisition.⁹

The 15-year period covers goodwill, going-concern value, workforce in place, business books and records, customer- and supplier-based intangibles, government-issued licenses and permits, non-compete agreements tied to a business acquisition, and franchises or trade names. You cannot accelerate this. If you dispose of a Section 197 intangible early, any remaining basis generally rolls into the basis of other Section 197 intangibles from the same transaction rather than producing a loss.⁹

Self-created intangibles, such as a patent you develop in-house, often fall outside Section 197 and follow different rules, sometimes with shorter recovery periods.

The De Minimis Safe Harbor for Small Purchases

Not every purchase needs to run through the depreciation schedule. The IRS tangible property regulations allow a de minimis safe harbor election that lets you immediately expense low-cost items. The threshold is $5,000 per invoice for businesses with an applicable financial statement and $2,500 per invoice for those without one.¹⁰

The election is annual and applies per invoice or per item, not as a yearly total, so a business can expense hundreds of qualifying items in a single year as long as each falls under the threshold. A $2,000 laptop or a $1,500 piece of shop equipment can go straight to expense instead of a five- or seven-year MACRS schedule.

For costs above the safe harbor, a separate framework decides whether the amount is a deductible repair or a capital improvement. Restoring the property after a breakdown or fixing ordinary wear generally counts as a repair. Making the property better than it was, adapting it to a new use, or restoring it after a major event is a capital improvement that gets added to basis and depreciated.

Depreciation Recapture When You Sell

Every dollar of depreciation reduces the asset’s adjusted basis. When you sell for more than that reduced basis, some of the gain is “recaptured” and taxed as ordinary income instead of at capital gains rates. This is the IRS taking back the earlier tax benefit.

For equipment, vehicles, and other personal property, Section 1245 taxes the depreciation-related portion of the gain entirely as ordinary income. Section 179 and bonus depreciation are treated the same as regular depreciation for recapture purposes, so heavy first-year expensing means a larger recapture exposure if the asset sells for a meaningful price later.¹¹

Real property follows Section 1250. Because buildings are depreciated on a straight-line basis, the recaptured gain is taxed at a maximum 25% rate rather than full ordinary rates, and any gain above the recapture amount still qualifies for long-term capital gains treatment.

Recapture is reported on IRS Form 4797.¹² The existence of recapture doesn’t undo the value of accelerated deductions; the time value of money still favors taking deductions earlier and paying tax later. But ignoring recapture when planning a sale produces surprises.

Book Depreciation vs. Tax Depreciation

Financial statements prepared under GAAP and tax returns filed under the Internal Revenue Code frequently produce different depreciation numbers for the same asset. A company might use straight-line depreciation over an asset’s estimated economic life on its books while claiming Section 179 or 100% bonus depreciation on its return. Total depreciation across the asset’s life is the same under both systems, but any single year can diverge sharply. Companies track the gap through deferred tax accounts. For a small business that doesn’t produce formal financial statements, the distinction matters less, but it becomes significant for any business showing statements to lenders or investors while making large capital investments.

1
Office of the Law Revision Counsel. 26 USC 179 – Election To Expense Certain Depreciable Business Assets
2
Internal Revenue Service. One, Big, Beautiful Bill Provisions
3
Internal Revenue Service. Topic No. 704, Depreciation
4
Internal Revenue Service. Publication 946 – How To Depreciate Property
5
Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
6
Internal Revenue Service. Instructions for Form 4562 (2025)
7
Internal Revenue Service. Treasury and IRS Issue Guidance on Additional First Year Depreciation Deduction
8
Internal Revenue Service. Revenue Procedure 2026-15
9
Office of the Law Revision Counsel. 26 US Code 197 – Amortization of Goodwill and Certain Other Intangibles
10
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
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Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
12
Internal Revenue Service. Instructions for Form 4797 (2025)